T J International T J International was founded in 1969 as ...



T J International T J International was founded in 1969 as Trus Joist International. The firm, a manufacturer of specialty building products, has its headquarters in Boise, Idaho. The company, through its partnership in the Trus Joist MacMillan joint venture, develops and manufactures engineered lumber. This product is a high-quality substitute for structural lumber, and uses lower-grade wood and materials formerly considered waste. The company also is majority owner of the Outlook Window Partnership, which is a consortium of three wood and vinyl window manufacturers. Following is T J International's adapted income statement and information concerning inventories from its annual report. T J International Sales:$618,876,000 Cost of goods sold: 475,476,000 Gross profit: 143,400,000 Selling and administrative expenses: 102,112,000 Income from operations: 41,288,000 Other expense: 24,712,000 Income before income tax: 16,576,000 Income taxes: 7,728,000 Net income: $ 8,848,000 Inventories. Inventories are valued at the lower of cost or market and include material, labor, and production overhead costs. Inventories consisted of the following: Current Year Prior Year Finished goods: $27,512,000 $23,830,000 Raw materials and work-in-progress 34,363,000 33,244,000 TOTAL 61,875,000 57,074,000 Reduction to LIFO cost (5,263,000) (3,993,000) FINAL TOTAL $56,612,000 $53,081,000 Instructions (a) How much would income before taxes have been if FIFO costing had been used to value all inventories? (b) If the income tax rate is 46.6%, what would income tax have been if FIFO costing had been used to value all inventories? In your opinion, is this difference in net income between the two methods material? Explain. (c) Does the use of a different costing system for different types of inventory mean that there is a different physical flow of goods among the different types of inventory? Explain.

|(a) |Sales |$618,876,000 |

| |Cost of goods sold* | 474,206,000 |

| |Gross profit |144,670,000 |

| |Selling and administrative expense | 102,112,000 |

| |Income from operations |42,558,000 |

| |Other expense | (24,712,000) |

| |Income before income tax |$ 17,846,000 |

| | | |

| |*Cost of goods sold (per annual report) |$475,476,000 |

| |LIFO effect ($5,263,000 – $3,993,000) | (1,270,000) |

| |Cost of goods sold (per LIFO) |$474,206,000 |

(b) $17,846,000 income before taxes X 46.6% tax = $8,316,236 tax; $17,846,000 – $8,316,236 tax = $9,529,764 net income as compared to $8,848,000 net income under LIFO. This is $681,764 or about 8% different. The question as to materiality is to allow the students an opportunity to judge the significance of the difference between the two costing methods. Since it is less than 10% different, some students may feel that it is not material. An 8% change in net income, however, is probably material, but this would depend on the industry and perhaps on the company’s own past averages.

(c) No, the use of different costing methods does not necessarily mean that there is a difference in the physical flow of goods. As explained in the text, the actual physical flow need have no relationship to the cost flow assumption. The management of T J International has determined that LIFO is appropriate only for a subset of its products, and these reasons have to do with economic characteristics, rather than the physical flow of the goods.

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